COMMUNITY BANCORP VT

INTEREST INCOME VERSUS INTEREST EXPENSE (NET INTEREST INCOME)

The largest component of the Company’s operating income is net interest income, which is the difference between interest earned on loans and investments versus the interest paid on deposits and other sources of funds (i.e., other borrowings). The Company’s level of net interest income can fluctuate over time due to changes in the level and mix of earning assets, and sources of funds (volume) and from changes in the yield earned and the cost of funds (rate paid). A portion of the Company’s income from municipal loans is not subject to income taxes. Because the proportion of tax-exempt items in the Company’s portfolio varies from year-to-year, to improve comparability of information across years, the non-taxable income shown in the tables below has been converted to a tax equivalent basis. The Company’s corporate tax rate is 21%, therefore, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by 79%, with the result that every tax-free dollar is equivalent to $1.27 in taxable income.

Tax-exempt income was derived from $54.5 million and $34.6 million of municipal loans, at December 31, 2023 and 2022, respectively, and from $10.5 million and $11.3 million of tax-exempt municipal securities in our investment portfolio, respectively, as of such dates.

The following table provides the reconciliation between net interest income presented in the consolidated statements of income and the non-GAAP tax equivalent net interest income presented in the table immediately following for each of the last two years.

The following tables present the daily average assets and the daily average liabilities, including the yields on interest-earning assets and interest-bearing liabilities for the respective comparison periods. Interest income (excluding interest on non-accrual loans) is expressed on a tax equivalent basis, both in dollars and as a yield/rate for the comparison periods presented. Net interest income, net interest spread, and net interest margin are also expressed on a tax equivalent basis.

(1) Included in gross loans are non-accrual loans with average balances of $7,661,241 and $6,668,862 for the years ended December 31, 2023 and 2022, respectively. Loans are stated before deduction of unearned discount and ACL, less loans held-for-sale and include tax-exempt loans to local municipalities with average balances of $46,351,846 and $43,514,790 for the years ended December 31, 2023 and 2022, respectively.

(2) Included in other investments is the Company’s FHLBB Stock with average balances of $822,185 and $716,626, respectively, with a dividend rate of approximately 8.63% and 4.20%, respectively, for the years ended December 31, 2023 and 2022, respectively.

(3) Net interest spread is the difference between the average yield on average interest-earning assets and the average rate paid on average interest-bearing liabilities.

(4) Net interest margin is net interest income divided by average earning assets.

The average volume of interest-earning assets for the year ended December 31, 2023 increased 3.5% compared to December 31, 2022. The average yield on interest-earning assets increased 87 basis points for 2023 versus 2022.

The average volume of loans increased 11.9% for 2023 versus 2022, and the average yield on loans increased 70 basis points to 5.35% for 2023, compared to 4.65% for 2022. The increase in the yield in 2023, was attributable to the rising interest rate environment year over year. Interest earned on the loan portfolio as a percentage of total interest income was approximately 89.1% and 87.7%, respectively for 2023 and 2022.

The average volume of the taxable investment portfolio (classified as AFS) decreased 2.7% for 2023 versus 2022, and the average yield increased 44 basis points for 2023 versus 2022.

The average volume of the tax-exempt municipal investment portfolio increased $4.3 million, and the tax-equivalent yield increased 38 basis points to 4.08% for 2023 compared to 3.70% for 2022.

The average volume of sweep and interest-earning accounts, which consists primarily of interest-bearing accounts at the FRBB and two correspondent banks, decreased 75.1% during 2023 compared to 2022. This decrease in volume is attributable to the funding of loan growth during 2023. The average yield on these funds increased 293 basis points in 2023 versus 2022, reflecting the numerous increases in the federal funds rate initiated by the FRB during 2022 and 2023.

The average volume of interest-bearing liabilities for the year ended December 31, 2023 increased 5.1% compared to the year ended December 31, 2022. The average rate paid on interest-bearing liabilities increased 111 basis points during 2023 compared to 2022. A substantial increase in average borrowed funds and the cost of these funds, along with a moderate increase in average customer account balances together with an increase in average rates paid on these accounts resulted in an increase in interest expense in all components of interest-bearing liabilities.

The average volume of interest-bearing transaction accounts increased 5.5% for 2023 versus 2022 reflecting moderate deposit growth during 2023. The average rate paid on these accounts increased 109 basis points for 2023 versus 2022. Interest paid on interest-bearing transaction accounts as a percentage of total interest expense was 35.3% and 34.2%, respectively for 2023 and 2022.

The average volume of money market accounts decreased 0.8% during 2023 compared to 2022, while the average rate paid on these deposits increased 122 basis points during 2023.

The average volume of savings accounts decreased 7.5% for 2023 versus 2022, while the average rate paid on these accounts increased two basis points during 2023.

The average volume of time deposits increased 3.7% for 2023 versus 2022, and the average rate paid increased 125 basis points during 2023. The increase in the average rate paid on time deposits between comparison periods reflects competitive pressures in a rising rate environment, which resulted in an increase in the average volume of these funds during 2023.

The average volume of repurchase agreements increased 13.2% during 2023 and the average rate paid increased 158 basis points for 2023 versus 2022.

In summary, the average yield on interest-earning assets increased 87 basis points during 2023, and the average rate paid on interest-bearing liabilities increased 111 basis points. Net interest spread decreased 24 basis points for 2023 with a net interest spread of 3.10% for 2023 compared to 3.34% for 2022. Net interest margin increased one basis point during 2023 to 3.48% from 3.47% for 2022.

The following tables summarize the variances in interest income and interest expense on a fully tax-equivalent basis for the annual periods presented, resulting from volume changes in daily average assets and daily average liabilities and fluctuations in average rates earned and paid.

(1) Items which have shown a year-to-year increase in volume have variances allocated as follows:

Variance due to rate = Change in rate x new volume

Variance due to volume = Change in volume x old rate

Items which have shown a year-to-year decrease in volume have variances allocated as follows:

Variance due to rate = Change in rate x old volume

Variances due to volume = Change in volume x new rate